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Is Procurement ‘dumbing down’ contracts?


Twice in the last week I have had conversations with people who think that Procurement functions today are ‘dumbing down’ contracts. If true, that’s a big mistake and will undercut the stated ambition of the function to raise its profile and value. It is also at variance with what we see happening in at least some IACCM member organizations.

Why are they saying it?

One of those who made the comment is a globally respected attorney, who has led multiple complex negotiations, typically working for the buyer. He observed growing difficulty in gaining the attention of procurement teams to discuss contract terms and options. In his view, ‘the talent pool in Procurement is shrinking. They just want the contract done quickly, without much caring what’s in it, and then ignore it’. This view was in many ways supported during a conversation with the co-founder of one of the top contract management lifecycle systems, who observes a growing tendency for Procurement groups to want a contract agreed prior to the RFx process, so that ‘it won’t cause delay’. The problem, of course, is that this often means a misfit between the contract terms and the business requirement, including the way that risks and responsibilities are allocated. ‘They end up with almost inevitable conflict or disagreement down the line.’

Why does it matter?

Contracts should be critical business instruments for establishing and delivering value. Contracts provide a business discipline, a structure for critical thinking. Far from being just a set of words, they represent a journey, a lifecycle that frames the commercial logic, the required actions and behaviors of the contracting parties and which specify a value outcome. Smart business people don’t view contracts as legal instruments; they use them to ensure the right conversations, to test understanding and each party’s true intentions and capabilities. Based on this, they agree responsibilities, performance mechanisms, change procedures. Depending on the nature and duration of the relationship, it is the time to decide what’s in the contract and what stays outside it – for example, the approach to innovation, supplier relationship management, governance and performance.

By failing to grasp and ‘own’ contracts, Procurement groups miss an opportunity to achieve one of their greatest aspirations – to be accepted and respected by other functions. Contracts are by their nature multi-disciplinary and integrationist. The function that leads on the contract has to interact across the business and build understanding of the viewpoint of other stakeholders. It also partners with the business not only in establishing agreements, but in ensuring their performance.

Transforming in the right direction

Many Procurement groups are under pressure to ‘transform’. Frequently, this is seen as increasing speed, ensuring compliance and expanding activities into supplier relationship management. Technology is playing a big role in achieving these goals, supplemented by a focus on ‘soft skills’ in areas such as communication, negotiation and relationship management. However, these may not be enough to measurably improve effectiveness, rather than just efficiency. There is a danger that Procurement’s traditional view of contracts as administrative templates will indeed lead to a further retreat from this aspect of business – with a negative impact not only for the function, but more generally for the value that is generated from its trading relationships.

So what is your experience? What are your views? Is it the case that Procurement is ‘dumbing down contracts’?

 

“Digitizing contracts is an eye-opener”


My title is a quote from an executive at contract management provider Icertis and helps explain the growing momentum and interest in contract-related technologies.

The field remains volatile, as evidenced by two recent acquisitions – Exari with Coupa and Determine with Corcentric. These moves by two finance-oriented software providers further illustrate the point that today’s contract management tools are increasingly focused on economic value rather than simply control and compliance. While Determine has been operating in various forms for some 20 years and has always been praised for the quality of the user interface, Exari is a much newer entrant to the field and has developed some excellent risk management and contract production tools, making extensive use of artificial intelligence. Both of these are interesting moves and continue the wave of consolidations that have typified the market in recent years.

The move by Coupa is especially worth watching since it appears to be an effort to address the limitations of traditional spend-management solutions, which have struggled to offer meaningful contract management support. The concept behind this acquistion is therefore attractive and, subject to successful integration of the two systems, should position Coupa extremely favorably relative to its main competition.

The broader market

Meantime, the overall market remains highly fragmented, with multiple providers jockeying for position. IACCM’s free contract software comparison tool is assisting several thousand potential buyers each month as they seek to understand their options and the best fit for their requirements. In the last week, I have had fascinating discussions with leaders from Icertis and SirionLabs, both of which continue to win major new accounts and are at last achieving enterprise-wide adoption, with their post-award functionality providing a compelling return on investment.

Procurement contracts remain the major focus for many providers. Their clients appear to believe that this is where they can achieve substantial savings and drive faster cycle times. Many also see automation as an alternative to improving contract-related skills – or perhaps as a necessary pre-cursor. By consolidating lifecycle data, they will start to identify major opportunities to reduce value leakage and cut the cost of their commercial operations.

However, there are providers who continue to make headway with sell-side contracting. Pramata is one of those and has today announced further enhancements to its Commercial Relationship Baseline, which it claims is effective at ‘eliminating billing errors, driving more profitable upsells and renewals, and reducing customer churn’.

The bottom line

It is encouraging that we are at last seeing far more compelling reasons for acquiring contract-related software. For too long, the return on investment was predicated on nebulous resource and efficiency savings that proved at best elusive and at worst unrealizable. The latest generation of tools are far more adaptable and agile, using APIs to support the dataflows on which contract performance and intelligence depends. In fact, these systems are fast exposing the inadequcy of traditional internal systems which one provider describes as ‘clunky and slow’. At last, the scale of potential improvements in both cost reduction and revenue increase is being both understood and realized.

Digitizing contracts is indeed an eye-opener – at least for those who choose to see.

 

Ranking (and reforming) Public Procurement: a complex task


The Blavatnik School of Government at Oxford University recently released a report containing its 2019 assessment of International Civil Service Effectiveness. Within this, it included a series of specific assessments, one relating to public procurement.

It is interesting to compare the conclusions reached by the Blavatnik team with those reported by IACCM in its recent Multi-Jurisdictional Benchmark Study. While there are some similarities, it is the differences that illustrate how varying criteria can lead to significantly different results.

The Blavatnik study assessed six ‘component scores’ when determining procurement effectiveness, against eight used by IACCM. While there were overlaps, the Blavatnik data was in several key areas either different or, in some cases, much narrower than the IACCM equivalent. For example, Blavatnik examined transparency and integrity, whereas IACCM looked at approaches to risk and contracting standards; Blavatnik scored e-procurement and handling of Small-Medium Enterprises, whereas IACCM looked more broadly at the use of technology and the quality of supplier relationships. As result, a number of countries achieved very different rankings on the Blavatnik table than they did in the IACCM assessment.

It’s the outcomes that matter

Based on the respective reports, IACCM’s work was in some cases not only broader, but perhaps also deeper. It gathered a wide range of inputs from primary sources, including from suppliers to government. This led to some quite different conclusions. As an example, Denmark achieved second place on the Blavatnik index, but was considerably lower in IACCM’s rankings. That is because Blavatnik gave a high rating to the Danish e-procurement system (a view shared by IACCM), but appeared not to recognize that this covers only a very small percentage of spend. More than 90% of government procurement in Denmark is highly decentralized and, while there are some excellent local initiatives, these are not replicated across ministries. Indeed, a large proportion of expenditure is managed at a regional level, resulting in high levels of fragmentation and diversity of standards.

The United Kingdom is another example where extensive investment in building procurement capabilities has yet to yield the results that might be expected of a country that Blavatnik ranked in third place. This is illustrated not only in the IACCM findings, but also by the conclusions of an almost simulataneous report released by ‘Reform’, a think-tank for public services, which examined the state of public services commissioning. It concluded that there has been an imbalance in the investments made, with disproprtionate attention to the ‘contracting-out’ phase and insufficient on contract management and on supplier selection. With so much public service delivery now depending on private sector performance, this continues to result in regular and highly publicized exposures to cost and quality.

Some years ago, a former executive from the US government made the observation: “We often undertake a perfect procurement and achieve completely the wrong outcome”. His point was that the measurements and incentives associated with a ‘good’ procurement’ are often perverse – for example, based on nominal savings at the time of contract, or on avoiding competitive challenge. IACCM’s research confirmed that the public sector worldwide is to some extent struggling with outdated public procurement rules and attitudes to risk, resulting in a reduction in competitive bidding and real challenges in achieving the levels of supplier partnering that modern economies require.

The way forward

Addressing these issues is itself a key commercial challenge and cannot be achieved by a single jurisdiction. It is interesting to note that smaller economies are often far more effective at generating better results from their procurements. That’s because they can often be more nimble in their actions and also because those actions may be less scrutinized and less likely to generate complaint. (Indeed, in the Blavatnik report, out of the top seven countries, four have a population under 10 million).

But at the other end of the scale, the United States frequently demonstrates creativity and innovation in its approaches to contracting and procurement. While not always successful, this readiness to experiment is essential to future development.

Ultimately, we must hope that studies such as those by Blavatnik and IACCM, together with the work of institutions such as the Open Government Partnership, will generate the global debate that is needed for meaningful reform of public procurement policies and practices. This is not a matter of academic debate – it is a topic that is fundamental to the quality and value we achieve from public services.

A summary of the IACCM Multi-jurisdictional study is available on request from info@iaccm.com

 

Contract drafting vs contract intelligibility


In his blog, ‘Contract Drafting Wars’, Mark Anderson has joined the debate over ‘fit for purpose’ contracts. It’s an important discussion because contracts today permeate almost every corner of society – and for most people are unintelligible and exclusionary.

A battle – or difference of perspective?

Mark is perceiving that there is a battle going on between IACCM and Ken Adams (author of a Manual of Style) regarding contract drafting. With the greatest of respect, he misses the point. This is actually a debate about inclusiveness and intelligibility, about the fundamentals of purpose and design, of which drafting style is but a component.

Let’s start with a few facts:

– approximately 4 out of every 5 people do not speak English

– approximately 1 in 6 people (and 1 in 4 women) are illiterate

– less than 0.001% of contracts are litigated; their primary purpose is not to facilitate legal disputes, but to frame an economic arrangement

– even when litigated, courts do not (as Mark suggests) depend solely on words. They have to interpret drawings (engineering and construction); maps (property); software code (IP); musical notes (copyright); designs (patents); video and even e-mojis (yes, there are legal experts in this too). The trend to alternative media is unstoppable.

The change is already happening

IACCM members – some of the world’s biggest corporations – are recognising these forces and the importance of user-based design. They understand that the typical users of contracts are not courts and not lawyers. The first principle of good communication is not whether the transmitter believes it to be clear, but whether the receiver understands it. On this count, traditional contracts fail miserably and it is obvious that A Manual of Style cannot possibly on its own fix the problem.

The emerging world, with its expectations of greater inclusiveness and equality, is challenging for lawyers (and other established professions), yet also exciting. It demands new thinking and a readiness to test and, where appropriate, adopt fundamentally different approaches. Technology will be disruptive. Digitisation offers exciting possibilities. Computable contracts, smart contracts, video contracts, comic contracts – they are all emerging realities and at IACCM we welcome this opportunity to educate, to innovate, to make contracts living instruments, to end a world where they are too often a barrier to social inclusion and justice. In this ambition, we are joined by many lawyers and legal academics from around the world, anxious to lead institutional change and adapt legal practice to the realities of modern business and society.

Within this mix, does A Manual of Style have a place? Absolutely yes. That is why we have always been pleased to promote Ken’s work. Where we disagree is not whether the Manual has value, but whether there is a much bigger need than simply standardising the words for English language contracts. As the facts above illustrate, A Manual of Style is a relatively small step on what is an enormous staircase to the future.

Future contracting: stronger together


Big organizations have traditionally seen little need to collaborate. Their size gives them power – power over suppliers, customers, distribution networks, even over government and public policy. When it comes to negotiation, they simply don’t do it. Contract terms are imposed on the counter party. Why be reasonable when you can instead exercise control (and call it ‘compliance’)?

This attitude still exists, but increasingly proves to be outdated. The networked world exposes bullying, reveals secrets and condemns unethical behavior. The forces that drive the modern economy are also driving increased partnering and collaboration. They enable open, streamlined data flows that result in improved speed and quality of decision-making and better business results.

Not just opinion

Many commercial professionals – especially those within IACCM – have recognized the truth of this for years (read, for example, IACCM’s annual reports on the Most Negotiated Terms, dating back to 2002). The problem has been how to make the switch.

Yesterday, IACCM partnered with Leeds University Law School to stage an Academic Symposium. While coming from significantly different perspectives, speaker after speaker reinforced the message about cooperation. Lisa Bernstein from Chicago Law School promoted ‘managerial contracts’; Haward Soper from Leicester University highlighted the fact that contracts frame relationships; Christof Backhaus from Aston Business School explored cooperation in the context of ethics; and Olivier Goodenough from University of Vermont offered insight to the way that computational contracts will free up time, allowing a shift in the focus of our negotiations.

I could cite many others from this outstanding event – but the important point is that new thinking is fast becoming mainstream. ‘Stronger together’ is shifting from a mantra to a true movement that will deliver both economic and social benefit. IACCM- along with its fast-growing array of academic partners and industry thought-leaders – is assisting its members to implement the practical approaches that give collaboration meaning – contract design and simplification, relational and performance contracts, research and training. These are truly exciting times!

Discover more by joining us at one of the many IACCM events – conferences, member meetings, webinars. See http://www.iaccm.com for details.

Are KPIs past their sell-by date?


Key Performance Indicators – or KPIs – are held up as critical elements for driving contract success. They bring clarity and discipline to complex situations, allowing both supplier and customer to monitor progress and performance.

But do they? Are KPIs of practical use, or are they in fact a distraction, often contributing to failure?

Pro’s and Con’s

KPIs are essentially a measurement system and, as with any measurement system, they impact behavior. Their intent is to drive a desired outcome and they can be very effective in doing that. But there are problems that frequently arise, especially as the complexity of the contract grows:

1) what are the real priorities and is it possible to build consensus across the major stakeholders?

2) what is a manageable number of KPIs without them causing confusion?

3) how do we ensure that the things that are left out are not ignored?

4) what process will we follow to update or amend KPIs over time, to reflect changing needs or circumstances?

These problems often become evident in poorly performing contracts where either there are just too many KPIs, or the selected KPIs are being met but are not delivering user value, or the original KPIs are outdated and have not been amended.

Are there alternatives?

I am seeing growing interest in finding an alternative approach, especially when the contract is long-term and / or where there are significant areas of potential change and uncertainty. Two methods that can work are relational contracts and agile contracts.

The relational contract focuses on establishing a robust governance framework where there is continuous communication and evaluation of performance against a clearly defined business goal or objective. In this context, the integrated team may be more focused on qualitative indicators of performance and they manage through more dynamic data exchange. This may involve the use of technology to ensure consistent data flows and early warning of problems or issues, leading to more proactive planning and mitigation. While KPIs may still feature in some way, they are not essential and certainly they are regularly revisitied and adapted.

Agile contracts tend to be driven by milestones rather than KPIs. By breaking the contract into short-term components, their continuation depends on reaching specific goals or deliverables. Payment is also tied to those milestones.

In conclusion, KPIs do have a continued role as one method of performance management, but they are not always the best approach. This is an area that would probably benefit from greater research and guidance on leading practices. Do let me know if you have encountered any useful material on this overall topic of the options for managing contract performance.